Europe tackles agriculture subsidies

Last week the European Union (EU) took a step toward reform of its Common Agricultural Policy, or CAP. Cutting farm subsidies and tariffs in developed countries has been a major obstacle to freer world trade in the Doha negotiation round of the World Trade Organisation.

Agricultural protectionism is costly for consumers and encourages inefficiencies in agriculture:

  • Europe's CAP costs $50 billion a year, half the entire European Union budget; the French alone receive more than $10 billion a year from the EU to keep unproductive farmers in business.

  • CAP subsidies account for 35 percent of the entire value of European farm production, about double the share of America's.

  • Due to market distortions, the price of sugar in Europe, for example, is two and a half times the prevailing world price.

    Under the so-called "radical reforms," the EU won't pay subsidies based on what farmers produce.

  • The EU will pay farmers just as much, but instead will pay them for things like protecting the environment, keeping the cows well groomed and following food safety rules.

  • Under the old system, the EU guaranteed prices to farmers and bought directly whatever couldn't be sold on the market – and it restricted imports.

  • The reform removes the incentive for overproduction that so distorts world agricultural markets – and punishes in particular the developing world.

    However, the French managed to impose an opt-out clause that lets a country maintain the current payment-for-production if it is necessary to keep farmers in business. Which may cancel out the "reforms".

    Source: Editorial, French De-Capitation, Wall Street Journal, June 30, 2003.

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    For more on International Trade Barriers

    FMF Policy Bulletin/1 July 2003

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